A generally quiet end to the week, so maybe some profit-taking ahead of the weekend or hedging due to the uncertainty around the situation in Afghanistan? Next week is full of central banks data points so we could be squaring up before then. The US dollar coming off on the preliminary sentiment data is a sign of what could come if the Delta variant were to spiral out of control, but expectations are for a better outcome in the coming months.
The forex heat map is looking particularly mixed but essentially the forex positioning is towards the risk-off as the Japanese yen and Swiss franc are bid. The USD and CAD are having a bad time of it during the US session following on from US sentiment data and a miss for the Canadian PPI data today.
The Michigan Consumer Sentiment preliminary reading for August dropped significantly to 70.2 making it the worst reading for almost a decade. Consumers reported a stunning loss of confidence in the first half of August.
The report states,
“The losses in early August were widespread across income, age, and education subgroups and observed across all regions. Moreover, the losses covered all aspects of the economy, from personal finances to prospects for the economy, including inflation and unemployment. There is little doubt that the pandemic's resurgence due to the Delta variant has been met with a mixture of reason and emotion.“
Expectations are that consumers will come back more positively in the months ahead but that depends on the policy response to the Delta variant.
The ActivTrades sentiment indicator for the US dollar index is extremely pessimistic as 94% of traders are shorting the greenback.
Those retail traders are having an okay day today but the likelihood of buyers stepping in at the next balance area around $91.80-$92.20 is high as the market still expects the Fed to tighten monetary policy in the coming months and will position for this once the weak longs have been flushed out.
The overall move into the Japanese yen today hasn’t translated to the ActivTrader sentiment indicator but the slight bias towards retail longs in the USDJPY is increasing moderately.
The double top formed recently is a target I will expect the price to visit again soon after the buyers get another chance to jump in around the 109.300 level. Should the swing low not act as support the next logical target would be the April 2021 swing low but that would mean a larger sell-off in the US dollar or some sort of market event which pushes traders into the yen. Currently, the equities markets are not signaling any particular build-up of fear.
The S&P500 is grinding higher sticking very closely to the Raff Regression line. The Nasdaq appears to have got back into the green for the week at the London close which makes it a full set for the indices I follow. The S&P500 is up 0.65% for the week whereas the Dow Jones Industrial Average gained 0.90% so far this week.
In the forex analysis this morning I mentioned that I am expecting the EURGBP to come off from the higher time frame supply zone. This is based on the breakdown of the 0.8500 level which has been re-tested recently but also because the retail sentiment on the ActivTrader platform is extremely bullish. We had good trade balance data for Europe today but I am convinced that this was used by larger players to get out of their longs into the retail liquidity.
The price action is starting to build on the m30 chart for the EURGBP in a manner that is conducive to a slower progression. We have a new high, followed by a low and lower high. Just need a break of that low to confirm a lower low and at this point momentum, in my opinion, will accelerate to the downside. I am wrong if we get back above the 0.8520 level.
Next week is heavily weighted towards the central banks and at the end of the week options expiry. We also receive the FOMC meeting minutes so mid-week could be pivotal for the rest of the trading in August.